After a record year in 2021, M&A activity is leveling off in 2022, according to PwC’s Deals 2022 mid-year outlook. Even with economic uncertainty and lingering structural challenges like the supply-chain mess, labor shortages, and energy prices, the M&A market is likely to continue to be strong through 2023, with nearly a trillion dollars in private-equity dry powder alone, according to PwC.
However, organizations are now taking a more measured, strategic approach, looking to M&A to build resilience, accelerate digital transformations, and bridge organizational digital gaps, according to John Potter, PwC Partner and US deals sector leader.
CFO Brew recently spoke to Potter about what successful companies are doing in this M&A market, how organizational decision-making is changing, and why this M&A market is different.
This interview has been lightly edited for length and clarity.
What are you seeing in the M&A market right now?
The M&A market so far in 2022 has actually performed very consistently with past years, even though we’re down from 2021. The volume and the activity is indicative of what I expect to be a continuously active market.
The nuance here in 2022 is that companies, investors, [and] private equity are navigating a different interest-rate and capital-costs environment, inflationary pressure, impacted growth outlooks and continued uncertainty in supply chains, labor markets, and the near-term economic outlook.
How do you see organizations looking at M&A as a way of boosting their digital transformations?
I expect executives will continue using M&A as a key lever to accelerate their transformation, their adaptation, and their strategic growth, including their investments in new capabilities, digital in particular, and their ability to meet their customers where they are, while also navigating the challenges of supply, labor, and cost inflation.
The priority on being a digitally agile business has never been higher from an executive perspective. Many new entrants, startups, and entrepreneurs are able to enter different sectors with digital capabilities as a differentiator, which becomes an attractive target for larger, established companies who are also looking to bring those digital capabilities. The acquisition of that new entrant is a great way to accelerate their adoption or transformation.
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Equally, we see continued investment directly into companies’ digital capabilities, and M&A can be a mechanism to scale that across a larger organization or larger business.
What are companies that are successfully navigating this M&A market doing?
One is the level of engagement within and across management teams and with boards. The discussions are not just focused on why a certain decision is the right decision, but acknowledging the alternatives that were considered in reaching that decision.
Capital allocation is not a binary “Should I or shouldn’t I?” It’s, “What should I do with this capital? Do I return it to shareholders? Do I invest it in my existing business? Do I invest it in a new business?” Where is that fit? So that notion of looking at the next-best alternative has become more common in many conversations.
I don’t think there [are] many executives who will sit down with a decision and say they know exactly what will happen. But the best ones right now are looking at the range of what would happen and what levers they have to navigate those elements.
The decision to invest is increasingly focused not just on the strategic fit and the value of what you’re acquiring, or investing in, but in your ability to drive incremental value beyond just integration and synergies.
And so looking at where we are now, the fascinating thing for most of our executives is they have more real-time information available. And the challenge is how to best consume it, capture it, analyze it, and use it to inform confidence in decisions. Knowing that what you don’t know is always going to be a factor.
Most investors today have never invested in an environment like we have now. But that doesn’t mean they shouldn’t. The key is how we do those investments well to drive the capital discipline and the returns that they can generate. Because we do know that investments made in downward or headwind economic cycles often generate the best return.—DA